Lately, global geopolitical uncertainty has been driven by Brexit) and US President Donald Trump’s isolationist policies and provocative international relations with North Korea. Trump’s unpredictable and populist approach to politics and international relations has led to increasing disunity and mistrust in his administration – evidenced by the recent failure to pass his proposed American Health Care Act, despite having a republican majority in the Senate. Additionally, Trump’s questionable appointments of politically exposed individuals has resulted in increased public outcry and subsequent dismissals, such as the appointment of Anthony Scaramucci as Communications Director of the White House; Herbert McMaster who succeeded Michael Flynn after 24 days into his term; and Jeff Sessions as Attorney General. Not forgetting, signing an executive order on 25 January 2017 to start building the Mexican border wall.
On the other hand, Brexit has created an increasingly deteriorating external position for Britain, with the full extent of consequences unknown. From June 2016 to date, Britain’s trade deficit has increased by 14.0% from USD 10.3 billion to USD 11.7 billion, David Cameron has resigned as Prime Minister, and foreign currency reserves declined by 17.3% (USD 2.3 billion) to USD 10.5 billion. Political uncertainty resulting from Brexit is expected to affect other countries, both within and outside the EU. This includes Malawi – a former colony of Britain, which heavily relies on British assistance and development funding and trade. Malawi has been forced to revise its budget for grant income downward by 18.5% for FY2016/17 and a further 19.5% for FY2017/18 budget.
Inevitably, the high stakes, growing tensions and complexity of geopolitics are affecting international trade relations and perpetuating the slow recovery of the global economy. Directly affected is SADC growth, and the possibility of jeopardising the prospects of trade agreements being negotiated with Regional Economic Communities (RECs) such as the Tripartite Free Trade Area (TFTA). For instance, Brexit could jeopardise the economic prospects and future of ongoing EU Economic Partnership Agreement negotiations, which have gradually increased SADC exports to the EU by 3.8% per annum from 2010 to 2015, before slowing to 0.8% in 2016. However, the British government has embarked on a stakeholder engagement campaign to reassure SADC partners of continued trade relations post-Brexit. US isolationism could also affect the future of the African Growth and Opportunity Act that advances market access for Sub-Saharan exports to the US, despite the Agreement being extended until 2025 by the Obama administration in April 2015.
An alarming increase in political uncertainty in the SADC region has raised concerns about the state of democratic transparency or succession. Timeously, this coincides with a number of national elections taking place: Madagascar (2017), Mozambique (2017), Swaziland (2017), the Democratic Republic of Congo (late 2017 or early 2018 after being postponed in 2016); Zimbabwe (2018) and South Africa is set to have its elections in 2019.
Lesotho’s elections on 3 June 2017 took place without major disruptions, despite the country’s recent history of post-election violence. Political tensions remain however, given that incumbent Prime Minister, Thomas Thabane, returned to lead the new government after fleeing the country following a failed assassination attempt in 2009. The recent assassination of his ex-wife, Lipolelo Thabane, has increased the expectation of looming violence.
Meanwhile, in Zimbabwe, there have been rising political tensions over the question of who will succeed President Mugabe after the 2018 elections. This is amidst calls for the ailing and aging president to step down – even from former supporters, like the military veterans. With a history of post-election violence, political tensions have also been driven by a lack of confidence in the current administration, which has been exacerbated by recent economic challenges in the country. Coupled with international sanctions, Zimbabwe was forced to implement a ‘Look East Policy’. However, due to its proximity and shared boundaries, Zimbabwe heavily relies on South Africa for trade, access to consumer and financial markets, and economic opportunities for a significant proportion its population living within the country.
With close economic and political ties with South Africa, Mozambique is also affected by deteriorating economic conditions. Together with the consequences of its own political uncertainty resulting from a USD 2.0 billion hidden debt scandal, of which more than USD 500.0 million remains unexplained due to irregular and unlawful expenditure of public finances. As a result of the hidden debt scandal and Kroll audit findings, investors have withdrawn financing and the IMF has suspended funding to Mozambique until audit findings are resolved. Similarly, Malawi’s Cashgate scandal – where government officials misappropriated MWK 13.7-20.0 billion (approx. USD 18.8-27.4 million) – interrupted Malawi’s economic recovery and affected investor and donor confidence. High ranking government officials closely linked to former President Joyce Banda, including seven ministers, were found guilty for looting state funding and adversely affecting the budget of the country. These countries are in increasingly vulnerable positions and actively pursuing relations within SADC in pursuit of accessing regional markets and private capital.
Surrounded with external pressure, South Africa is also faced with numerous internal challenges. A rising the number of individuals announcing their intention to run for President within the ruling African National Congress (ANC), undermines the succession plans presented by the current president, Jacob Zuma. However, the ANC has not yet announced its official presidential candidates for the 2019 election. Apart from the expected two candidates Nkosazana Dlamini-Zuma and Deputy President Cyril Ramaphosa, other candidates such as Lindiwe Sisulu, Jeff Radebe and Mathews Phosa have announced their intention to run for President. The list of presidential hopefuls also includes ANC National Executive Council members such as National Chairperson and Speaker of Parliament Baleka Mbethe, and Treasurer General, Zweli Mkhize. Increased contestation and internal voices calling for Zuma to step down, disagreements over Zuma’s recent reshuffles and democratic ideals, are signs of clear divisions and rising factionalism in the ANC. These internal interests have heightened political uncertainty, as different factions seek to gain power. Emerging allegations of state capture, featuring the influential Gupta family, have left state-owned enterprises (SOEs) like Eskom exposed.
These factors and an increasing government-guaranteed debt burden from SOEs, have resulted in downgrades from all three major international credit ratings agencies – Fitch, Moody’s and Standard and Poor’s. Following the downgrade, Moody’s also downgraded the rating of five South African banks – Absa Bank Limited, FirstRand Bank Limited, Investec Bank Limited, Nedbank Limited and Standard Bank of South Africa, due to their exposure to sovereign risk through SOE debt. This is bound to affect the government’s access to international capital markets, which is crucial for development, given that economic growth has been driven by public investment to implement structural changes identified in the National Development Plan (NDP). In addition, the credit downgrades should increase the risk premiums on future borrowing, due to the insecurity of government policy and implementation. Despite these downgrades and declining market confidence, the Rand has remained resilient given the currency has only depreciated by 0.02% since the January 2017 – albeit coming off of a relatively low base. However economic growth has been strongly affected by the loss of market confidence and new stories of mismanagement of SOEs due to politically exposed individuals who are in control.
South Africa entered a recession as of June 2017, with growth declining by 0.7% in 1Q2017 after a 0.3% decline in 4Q2017. This is the eighth recession that the country has faced since 1961 and the last time the economy was in recession was in FY2008/09. The recession has been driven by three consecutive quarterly losses, averaging -0.4% in manufacturing and an average of -0.5% in trade, catering and accommodation sectors since 3Q2016. Manufacturing production has declined by an average of -2.5% in 1Q2017, compared to 1Q2016 due to contractions in petrochemicals and wood and paper product subsectors. In addition, the trading sector declined due to a quarterly average contraction of -2.5% since 3Q2017. These losses can be attributed to the stronger rand, low global demand and depressed oil prices. In the context of these fundamental economic dynamics, and low confidence caused by political uncertainty, South Africa’s economic recovery from the current recession may be slow or delayed.
The country will no longer enjoy the same access to international capital markets to receive financing for its public sector investment programme, due to these depressed economic conditions and credit downgrades. International investors and capital markets have now focused their attention on the rising SOE liabilities. This prompted the government to recapitalise South African Airways, which has not turned a profit in the last six years. However, it is acknowledged that this bailout will not be sufficient to turn around the loss-making SOE without dealing with gross mismanagement and unfavourable loan agreements which have been guaranteed by government. Thus, political uncertainty has had a rising cost effect on the government and will continue to have a negative impact on growth given the difficult economic environment and increasing cost of borrowing, disrupting government’s attempts to stimulate growth through infrastructure investment.
This has prompted the South African National Treasury to implement a 14 Point Action Plan to regain market confidence. But the deterioration of public financial management is likely to lead to investor fatigue. In addition, the annual growth recovery plans create policy uncertainty and lack of accountability, since leaders are rarely required to evaluate progress on previous plans such as the 9 Point Plan of 2015, which overshadowed the NDP. These multiple short-term actions plans are reactive, and their implementation is rarely evaluated, which will deteriorate public and investor confidence in government’s commitment and further implementation. Given the central role played by South Africa in SADC and Southern African Customs Union (SACU), the negative economic impacts of political uncertainty will have a regional effect. This is apart from the domestic political uncertainties in SADC member states, which is affecting economies like Malawi, Mozambique, Zambia and Zimbabwe.
It is recognised that causes of political uncertainty should be understood from foundational values that influence policy surrounding state intervention in economic performance. A skilful and deliberate balancing act is required to understand the political economy climate. This also requires stepping out from the mainstream economic approach, which seeks to simply minimise the role of the state in the economy. It requires an appreciation of the very important role played by the state in promoting a more equitable distribution of income, even when this is not strictly efficient, and the role of the state in resolving market failure. More importantly, strong and decisive states can also consolidate private economic interest in favour of national development interest – which is the primary lesson from the Developmental State Theory, and evidenced by Southeast Asian states. However, this also requires the state to be insulated from private economic interest and political influence in order to maintain focus on the national interest. This has been the primary challenge affecting SADC states.
Ultimately, the central contentions need to mature beyond the equally distributed pros and cons. Although free markets are efficient, they cannot ensure equity and often lead to rising inequality, for example. While, state intervention is necessary to overcome inherent market failures, the state is not typically efficient, and can be susceptible to private capture. So, the central question is: How to harness the efficiency of free markets whilst enabling inclusive economic growth and equitable distribution of income?
The role of the state in the economy is highly contested, with varying schools of thought contributing their diagnosis on the influence of politics on economic performance. The challenge of political uncertainty is accompanied by complex intersectional issues, which need to be understood through a historical lens. Nevertheless, public and private sector transparency, accountability, and responsiveness are required to unlock the developmental potential of the state and private sector.
By Tafadzwa Mahubaba
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